College Versus Retirement

It’s a dilemma that most parents face at some point in their lives. There is a trade off between paying for your children’s college education and your financial independence. Unless your resources exceed your ability to spend, this is a truism. Yet it’s one that can be unpleasant to discuss as it could involve your interest being different than your child’s.

Most parents grapple with these issues in sequence, if they don’t ignore the college funding question altogether. Tuition bills for children arrive for most of us before we are ready to retire. Thus our tendency is to save for college first, possibly undermining our own financial security through borrowing against our homes or taking out PLUS loans that we parents must repay.

The challenge with this issue is that saving for retirement is far more important than putting money away for your children’s higher education. Other than Social Security, most of us have no other sources of funding our financial independence other than our own resources. Once you reach the time when you or your employer decides it’s time to retire, you need to have the financial strength to cover your own costs for the rest of your life.

Compare the lack of options of paying for retirement to those designed to cover higher education costs. To pay for college you can use your savings, grants and scholarships, federal student loans, work study and other jobs, and parent loans. Moreover, your child can attend college for $4,600 a year at Front Range, roughly $14,000 in tuition and fees at CU Boulder if living at home, or $70,000 a year at a private school including room and board.

The difference between these options is staggering. Your student could potentially work part-time and completely pay for their cost of education, or you collectively could go into over $200,000 in debt for an undergraduate education. It’s hard to move the needle this much when it comes to retirement spending. There are certain basic costs for housing, food, transportation, and medical costs that will not go away once you’re no longer working.

So how should parents balance out the need to save for college and their own retirement? We want the best for our children, yet we don’t want to be forced to appeal to their charity once we retire because their college costs have left us unprepared to support ourselves.

If we’re rational about college costs (which should not be taken for granted!), we shouldn’t put aside a dime in college savings until we have a sustainable financial independence plan in place. Such a plan does not mean that you should complete your retirement savings fund before saving for college. Rather you should know with reasonable certainty that with your current resources, planned rate of saving, and reasonable allowance for investment earnings that you could provide a sustainable cash flow to meet your retirement costs. In short you need a financial plan.

A financial plan sounds like a straightforward concept, but not all plans are created equal. There are retirement calculators available online from the major investment providers such as Charles Schwab, Fidelity, and Vanguard. They allow you to plug in your current portfolio balances and future savings, and will tell you whether you’re on track to retire. If you work with a financial planner, they should be able to build in more sophistication such as the tax-efficiency of different types of accounts including traditional and Roth IRAs, Social Security options including waiting until you turn 70, different rates of retirement saving before and after your children attend college, and other factors.

If you’re just guessing that you’re on track for financial independence when savings for college, then you run the risk of depending on your children for support in your retirement. Living with your adult kids may be a desirable arrangement, just make sure that it’s one you can enter into freely rather than be compelled to do so because of financial necessity.

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